Fin Min leaves H2 FY24 borrow plan unchanged, to issue bonds worth Rs 6.55 lakh crore

The government's market borrowing is an important determinant of interest rates for the rest of the economy.

The Centre will borrow Rs 6.55 lakh crore by issuing government securities in the second half of 2023-24, with Green Bonds worth Rs 20,000 crore being part of the total programme, the finance ministry said on September 26.

The Budget for 2023-24 had pegged the Centre's full-year gross borrowing programme at a record Rs 15.43 lakh crore on a gross basis and Rs 11.8 lakh crore in net terms.

Moneycontrol had last week reported the Ministry of Finance was unlikely to change the government's borrowing plan for the second half of 2023-24 and raise Rs 6.55 lakh crore as per the schedule announced in late March.

The Reserve Bank of India (RBI) manages the borrowing programme on behalf of the government by issuing bonds via auctions every week.

"These are our best estimates at this point in time," Economic Affairs Secretary Ajay Seth told CNBC-TV18.

"It's not just that these are budget estimates. Estimates at this point in time are showing we can manage our market borrowings as indicated in the budget. We don't have to overshoot it. We don't see as much under requirement as well. We also remain firm on the fiscal deficit number announced", Seth said, adding that he did not want to draw any conclusions from the small savings collections in the first four months of 2023-24.

The central government funds its fiscal deficit through a mix of borrowings from the bond market, proceeds from small savings schemes, and the draw down of its cash balance. For 2023-24, its fiscal deficit target is Rs 17.87 lakh crore - or 5.9 percent of GDP - with a net Rs 4.71 lakh crore set to come from small savings collections.

In October 2023-March 2024, the size of the weekly government bond auctions will range from Rs 30,000 crore to Rs 39,000 crore. The final auction for the current financial year will take place on February 16.

"Responding to market demand for longer duration securities, 50-year security will be issued for the first time," the finance ministry said in a statement on September 26.

The breakdown of the securities that will be issued is as follows:

* 6.11 percent of the borrowing will be via bonds maturing in 3 years

* 11.45 percent of the borrowing will be via bonds maturing in 5 years

* 9.16 percent of the borrowing will be via bonds maturing in 7 years

* 22.9 percent of the borrowing will be via bonds maturing in 10 years

* 15.27 percent of the borrowing will be via bonds maturing in 14 years

* 12.21 percent of the borrowing will be via bonds maturing in 30 years

* 18.32 percent of the borrowing will be via bonds maturing in 40 years

* 4.58 percent of the borrowing will be via bonds maturing in 50 years

The government will issue Green Bonds of three maturities: Rs 5,000 crore each of 5-year and 10-year and Rs 10,000 crore of 30-year. The 30-year Green Bond comes after Life Insurance Corporation of India (LIC) and other key domestic pension funds had expressed interest in investing in these instruments if they were issued with longer maturity periods, Moneycontrol had reported in July.

Earlier, in the last quarter of 2022-23, the government had issued Green Bonds maturing in only 5 and 10 years.

"The Government will continue to carry out switching of securities to smoothen the redemption profile," the finance ministry also said.

Also Read: Centre hopes to lower annual borrowing to Rs 12-13 lakh crore in next few years

Switch operations are conducted to ensure the government does not have to pay too large a sum as the principal amount as its bonds mature in any given year. For instance, bonds worth Rs 2.81 lakh crore are set to mature during November 2023-January 2024. The 2023-24 Budget had allocated Rs 1 lakh crore for switch operations for the current financial year. Of this, Rs 51,597 crore has already been used for these operations.

In addition to the bonds, the Centre will also issue Treasury bills worth Rs 3.12 lakh crore in the third quarter of 2023-24. Each of these weekly T-bill auctions will be to the tune of Rs 24,000 crore.

To tide over any temporary mismatches in the government's receipts and expenses, the RBI has fixed the Centre's Ways and Means Advances limit at Rs 50,000 crore for October 2023-March 2024.

The government's market borrowing is an important determinant of interest rates for the rest of the economy. With inflation expected to ease in the coming months and the amount of bonds the government will sell in the second half of the year coming down, economists expect bond yields to decline, especially in anticipation of two key events: a reduction in the policy repo rate by the RBI's Monetary Policy Committee (MPC) and the inclusion of Indian government bonds in JPMorgan's indices starting June 2024.

Also Read: A decade in the making, India's global bond index inclusion journey finally ends

According to Soumya Kanti Ghosh, State Bank of India's group Chief Economic Adviser, the 10-year government bond – which closed at 7.14 percent yield on September 26 – could fall to 7 percent by the end of 2023-24 and "should affirmatively breach 7 percent" in the next financial year. UBS strategists, meanwhile, have lowered their 2024 forecast for the 10-year yield to 6.75 percent from 7 percent.

The MPC, which has left the repo rate unchanged at 6.5 percent in its past three meetings after raising it by 250 basis points in 2022-23, is expected to start reducing it sometime in early 2024-25 once it has clarity on a sustained fall in inflation towards the RBI's medium-term target of 4 percent.

The rate-setting panel will next meet during October 4-6.